A month has gone by since the last earnings report for Michaels (MIK). Shares have added about 7% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Michaels due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.
Michaels Beats on Q4 Earnings & Sales Estimates
Michaels reported fourth-quarter fiscal 2018 results, wherein both the top and bottom line outpaced the Zacks Consensus Estimate. Also, earnings improved year over year. However, management’s earnings guidance for first-quarter and fiscal 2019 fell shy of analysts’ expectations.
Michaels’ adjusted earnings of $1.44 per share outshined the Zacks Consensus Estimate by a penny and improved 21% from the prior-year quarter number. Excluding the 53rd week in fiscal 2017, the bottom line rose 30.3%. The upside was backed by efficient expense management and the impact of the ongoing share repurchase program.
Net sales of this arts and crafts specialty retailer fell 5.4% year over year to $1,789.1 million. However, the top line surpassed the Zacks Consensus Estimate of $1,784 million. The year-over-year decrease was mainly due to 53rd week in last fiscal, the closure of all 94 full-size Aaron Brothers outlets and a dip in comparable store sales (comps). The decline was somewhat offset by sales from the operation of 20 additional flagship stores (net of closures).
Comps fell 0.4% in the fiscal fourth quarter, attributable to a decline in customers transactions, mostly compensated with a rise in average ticket. However, comps remained flat in constant currency. Adjusting for the calendar shift, comps edged up 1.4%.
Gross profit declined 7.7% year over year to $714.8 million, while gross margin contracted 100 basis points (bps) to 40%. The contraction in gross margin was due to a rise in distribution-related costs coupled with an unfavorable sales mix stemming from soft sales of low-margin categories such as technology and storage. Higher occupancy and product costs were added deterrents. The downside was partly offset by gains from the ongoing sourcing endeavors and lower promotional activity.
SG&A expenses, including pre-opening costs, decreased roughly 9% to $382 million on lower expenses associated with the closure of all the Aaron Brothers' stores as well as decline in advertising costs. Also, one less week in fiscal 2018 in comparison to fiscal 2017 resulted in lower expenses. As a percentage of sales, SG&A expenses came in at 21.3%, down 90 bps.
Further, adjusted operating income dropped nearly 6% to $333.2 million, mainly due to the impact of 53rd week last year. Excluding the 53rd-week impact, operating profit rose 1.8% with margin expansion of 56 bps.
During the fiscal fourth quarter, the company inaugurated three Michaels stores alongside closing and relocating one each. Also, it shuttered all its 36 Pat Catan’s stores. As of Feb 2, 2019, the company operated 1,258 Michaels stores.
For fiscal 2019, the company intends to open 24 Michaels outlets, which include nearly 12 Pat Catan’s stores that it plans to rebrand. Also, the company expects to relocate 13 Michaels stores. In the first quarter of fiscal 2019, the company plans to open four Michaels stores and relocate five.
Michaels had cash and equivalents of $245.9 million, long-term debt of $2,681 million and total stockholders’ deficit of $1,626.2 million as of Feb 2, 2019. Total merchandise inventory fell 1.3% to $1,108.7 million by the end of fiscal 2018. However, average Michaels inventory per store, inclusive of distribution centers, inventory in-transit and inventory for its e-commerce site, grew 2.7%.
Management incurred capital expenditures of $299 million in fiscal 2018, mainly related to investments in technology projects including e-commerce and data analytics capabilities as well as store-growth efforts. For fiscal 2019, Michaels expects to incur capital expenditures of about $135 million.
In fiscal 2018, Michaels bought back 24.6 million shares for $451.9 million under its share repurchase program. With this, the company had roughly $398 million available for share repurchases.
Michaels remains confident about its strategic initiatives. Also, the company has been gaining from enhancements pertaining to Michaels.com and the app; launching of buy online and pick up in store across all U.S. stores; and converting 238 additional stores to its flexible merchandising area format. These apart, the company remains focused on integrating its e-commerce and in-store operations to enhance the omni-channel experience. Further, Michaels provided an outlook for first-quarter and fiscal 2019.
For fiscal 2019, net sales are estimated in the band of $5.19-$5.24 billion, down from $5.27 billion generated in fiscal 2018. Comps are likely to come in the range of flat to up 1%. Further, management expects adjusted operating income of $640-$665 million and interest expenses of about $155 million. The effective tax rate for the fiscal year is expected between 23% and 24%. Adjusted earnings per share for fiscal 2019 are envisioned to be $2.34-$2.46, depending on weighted average shares of about 158 million. The company recorded adjusted earnings per share of $2.35 in fiscal 2018.
For the fiscal first quarter, comps are projected to decline in the low-single-digit range. Adjusted operating income is estimated to be $96-$106 million. Interest expenses are likely to be about $38 million, with an effective tax rate of 23-24%. Further, adjusted earnings per share are envisioned to be 28-33 cents, depending on weighted average shares of about 158 million.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in fresh estimates. The consensus estimate has shifted -18.61% due to these changes.
Currently, Michaels has a strong Growth Score of A, though it is lagging a lot on the Momentum Score front with an F. However, the stock was allocated a grade of A on the value side, putting it in the top quintile for this investment strategy.
Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending downward for the stock, and the magnitude of this revision indicates a downward shift. Notably, Michaels has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
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